Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Sunday, June 29, 2014

Congress Very Unlikely to Disturb Supreme Court's Endorsement of Basic Presumption of Reliance

The ruling by the Supreme Court in Halliburton was a strong reaffirmation of the fraud-on-the-market presumption of reliance in securities fraud actions, albeit tempered by the introduction of price impact at the class certification stage. By a 6-3 vote, the Court re-endorsed the presumption of reliance despite strong entreaties to overrule the 1988 Court ruling in Basic, Inc. v. Levinson as outdated and possibly even flawed when rendered. But make no mistake, this decision was a strong endorsement of Basic by a Court that greatly respects stare decises and a Chief who is very loathe to overrule precedent. Basic, Inc. will likely survive long into the future since it is highly unlikely that Congress will legislatively overrule what has to be now called a landmark opinion in the field of securities regulation.

The perfect time for Congress to take action on the Basic presumption of reliance was the Private Securities Litigation Reform Act of 1995, which effected a major, comprehensive overhaul of private securities fraud actions when Basic was only seven years old. Instead, Congress left Basic untouched/ I believe that the rule is that when Congress legislates in the same field in which the Supreme Court has ruled, and leaves the Court's ruling intact, Congress is presumed to have sub silentio endorsed the ruling, which it is presumed to be aware of. It is very rare for Congress to overrule legislatively a Supreme Court ruling. In fact, while not totally sure, I do not believe that it has ever happened in the field of Supreme Court securities opinions. For many years the late Senator Arlen Specter of Pennsylvania tried very hard to obtain a legislative overruling of the Supreme Court's ruling in the Central Bank case essentially prohibiting aiding and abetting liability in private securities fraud actions. It never happened.